Though term plans with variable sum assured are good, their limited tenure is a drawback.
As you keep getting older with more responsibilities and dependents, you must keep adding to your insurance cover, say financial planners. That means having multiple policies which are difficult to keep track of.
One way out is to have one insurance policy which gives additional cover as you grow older. Insurance companies such as Aegon Religare, SBI Life Insurance and IDBI Fortis offer term policies where the cover increases according to your life cycle or requirements. The best part: The premium stays the same over the years.
“To keep pace with rising income and changing lifestyle, one can opt for a plan where the sum insured rises every year,” said KS Gopalakrishnan, chief financial officer at Aegon Religare Life Insurance Co.
Under Aegon’s product — Increasing Term Plan — the sum insured increases by 5 per cent of the initial sum assured every year. A cover of Rs 50 lakh will become Rs 52.5 lakh in the second year and Rs 55 lakh in the third. The cover grows until it is double the initial amount and remains flat afterwards. The minimum tenure of the policy is 10 years and the maximum is 20 years.
SBI Life Insurance also offers a term plan with rising sum assured. The product — SBI Life-Shield Plan — has two options. The cover can increase either 5 per cent every year or 50 per cent every five years. The tenure ranges between 5 years and 25 years.
On the other hand, Bajaj Allianz Life Insurance’s plan — Unit-Linked Term Rider — is offered with a unit-linked insurance policy (Ulips) as a rider. The customer can double the life insurance cover in the Ulip. The rider does not have a cap on tenure and ends with termination or maturing of the base policy.
Only two insurance companies offer decreasing sum assured. Under Aegon Religare’s Decreasing Term Plan, the cover reduces 5 per cent every year. HDFC Standard Life Insurance has a similar cover, but only for home loans.
Term plans, the cheapest form of insurance, are advocated by financial experts as in case of death they give dependents a lump sum to take care of their future financial needs.
The most widely followed method to calculate the cover one needs is the expense replacement method. To arrive at the sum assured, one needs to calculate one’s annual expenses and adjust them to inflation.
If a person’s annual expenses are, say, Rs 360,000 lakh and average inflation is around 6 per cent, after 20 years, he will need around Rs 11.6 lakh to maintain its lifestyle.
Let us assume a person is creating a corpus of Rs 1.45 crore to meet this expense and has managed Rs 45 lakh with no liabilities. He would further need to buy a Rs 1-crore cover so that his dependents can live comfortably in case he, the bread earner, passes away.
For those with liabilities, such as home loans, insurance companies take these into account and provide additional cover.
However, there are stringent rules for getting such cover and the tenure is too short to cover a person’s life. “Insurance companies may not provide the exact cover a person seeks.
As a term plan is cheap, insurers have tight policies to protect themselves against any misuse. They take income as the criteria to decide the cover. The sum assured is 10-12 times the income,” said a financial planner.
For a Rs 1-crore cover, a person’s income should be upwards of Rs 8 lakh. In case he is unable to get the required cover, it is best to go for multiple policies.
Another important point is that the maximum tenure under these policies is 20 years. So, if you buy a 20-year policy at 35, it will expire at 55. At that age, buying another term policy could be difficult because of high premiums. For instance, if a 55-year-old buys a 20-year increasing-sum-assured policy, the premium will be Rs 104,399 a year. For a simple term plan, the cost will be Rs 72,577 a year only.
Increasing sum assured plans are costlier than term plans. If a 35-year-old buys a term policy with a Rs 50-lakh sum assured for 20 years, he will need to pay an annual premium of Rs 20,075. For a simple term plan, the premium will be Rs 13,843. “A person should first compare the premiums between the variable term plan and the level term plan before buying a policy,” said Lovaii Navlakhi, a certified financial planner.
Financial experts said a rising sum assured with static premium product should be bought by people in the 25-30 age group because it was cheaper than other policies. For those above 50, it is a tad too expensive.
